Markets added modest gains yesterday as investors were buoyed by a possible favorable outcome of the Fed policy meet and German court’s key decision if the nation can help the troubled neighbors. Despite the nature of modest gains, they were enough to lift the Dow to its highest level since 2007. However, the day lacked any major headlines or key economic data that made an impact on the benchmarks. Thus, volumes continued to be low and the lack of catalyst also justified for the moderate movements of the benchmarks.

The Dow Jones Industrial average (DJI) gained 0.5% and ended at 13,323.36. The Standard & Poor 500 (S&P 500) edged up 0.3% to finish yesterday’s trading session at 1,433.56. The tech-laden Nasdaq Composite Index moved up by a meager 0.51 point to close hardly changed at 3,104.53. The fear-gauge CBOE Volatility Index (VIX) was up 0.8% to settle at 16.41. Consolidated volumes on the New York Stock Exchange, the American Stock Exchange and Nasdaq were roughly 5.91 billion shares, sharply lower than last year’s daily average of 7.84 billion shares. Advancers outpaced the decliners on the NYSE in a ratio of 2:1.

Gains were modest but were sufficient to extend the Dow’s gains and lift it to the best levels in almost five years. However, the Dow’s jump to its highest level since 2007 did not come simply on the back of yesterday’s gains. Benchmarks have been rallying higher over the past few days, which in turn is largely due to fresh hopes about the US central bank announcing additional economic measures.

Those hopes have gained strength based on a few developments. At the end of August, US Federal Reserve Chairman Ben Bernanke had commented that the central bank “will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”.

Also, dismal nonfarm payroll data have boosted hopes about a third round of quantitative easing. Labor data is a key indicator of economic health. Strategists had opined that weak numbers would possibly make the US Federal Reserve prioritize the need for additional economic measures. A report by Reuters noted that economists predict there is a 60% chance that policy makers will announce QE3. Thus, all eyes are fixed on the two-day Fed meeting; and anticipations of a favorable result kept the markets in the green yesterday.

This apart, investors are also optimistic about what the German court will decide about the nation’s position on the Euro-zone fund. The Germany’s Constitutional Court on Wednesday will announce if it approves the European Stability Mechanism. However, market sentiment is of the belief that the court will approve the same.

Separately, it was reported that Moody’s Investors Service has sent out a warning about reducing the “Aaa” rating on US government debt. The ratings agency might cut the rating by a notch if the nation fails to successfully conclude budget negotiations.

On the other hand, the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, reported that the trade deficit climbed to $42.0 billion in July, modestly higher than $41.9 billion in June. This was narrower than consensus estimates of a deficit of $43.9 billion.